Tax hike and wage freeze in oversight board plan

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Pittsburgh's state-appointed financial overseers told a familiar tale of the city's financial woes: burdening debt, revenue shortfalls and under-investment in pensions and in the city's infrastructure, the latter evidenced by pockmarked streets and decaying public facilities.

On Friday, the team charged by the state a decade ago with guiding Pittsburgh to financial stability released the first draft of the city's next five-year plan that recommends increasing the city's pension payments and its investments in infrastructure. But to pay for it, they argued, the city has to make some difficult moves, including freezing wages for all city employees for a year and raising property taxes to make up for a miscalculation last year that led to a $6 million shortfall in property tax revenue.

"If we're talking about investing more money in roads and bridges and buildings and putting an adequate amount in the pension fund, I don't know how they would do it without increasing their taxes," said Gordon Mann of Public Financial Management, one of the proposal's authors.

The five-year plan, which will guide the city's financial decision-making, is one of the central requirements of the state's Act 47 program for financially distressed communities. Pittsburgh entered the program a little more than a decade ago. Despite massive strides, Mayor Bill Peduto advocated vigorously to keep the city under the program, saying it had not yet come far enough.

The plan will be introduced on Tuesday before city council, which must sign off on it before it goes into effect and is not likely to greet a recommendation to hike taxes warmly.

The revenue shortfall might pose an even larger challenge, as Mr. Peduto indicated he would push for greater spending on pension and infrastructure than was recommended by the Act 47 team.

The plan "presents a baseline, and does not go far enough to address our capital needs and pension obligations," Mr. Peduto said in a statement.

In an interview Friday, Mr. Peduto said that "my goal is to be able to meet all those goals without raising property taxes.

"They may have presented a plan that they feel is the best plan, but having gone through this now twice, knowing the process intimately, I can assure you there are other options that we will be able to hopefully pursue," he said.

Council President Bruce Kraus and Councilman Corey O'Connor, the only members reached for comment Friday, said they were still reviewing the plan. Mr. O'Connor said there could be alternatives to fill revenue gaps.

"There could be 30 options out there," Mr. O'Connor said. "I don't think anybody on city council would want to raise taxes."

In its report, the authors explained the tax hike was necessary because of a miscalculation made under the Ravenstahl administration last year that led the city to cut the tax rate too far as it attempted to blunt the effect of rising assessed property values. In January 2013, then-Mayor Luke Ravenstahl dropped the city's property tax rate from 10.8 mills to 7.56 mills as a way to ensure the city didn't reap a windfall, a move that was approved by city council. The city, rather than breaking even, collected $7.3 million less in 2013 than it did in 2012 and $6 million less than it anticipated.

"The Administration and Council were trying to 'err on the side of taxpayers,' to soften or eliminate any reassessment-related increase in real estate tax bills," the report reads. "But the unintended, actual impact was that receipts from the City's largest source of revenues were dialed back to what they were when the City first entered Commonwealth oversight [in 2003]."

The authors also said another move altered the city's financial trajectory. Right before Mr. Peduto took office in January, the pension board made a change that led to a rise in the minimum pension payment that will go into effect next year. While the Act 47 team called the move "prudent," they said it will cost the city an additional $8 million a year.

Controller Michael Lamb, a pension board member who supported the change, was skeptical of the Act 47 team's conclusions. He does not believe the alteration has to spell an increase in pension contributions overall since the city already pays far beyond what it's required to. He accused them of using it "as a scapegoat for a tax increase."

"That's just way out of line," he said.

If the city continues down its current path, the Act 47 team warned, the city will spend $8.9 million more than it will take in next year, with the deficit increasing every year following and continuing to eat into the city's reserves. Those projections are based on "baseline" spending on the pension fund and capital improvements and could be exacerbated if the city decides it needs to invest more.

The Act 47 team's recommendation for a yearlong wage freeze comes as the city's police and fire unions prepare to negotiate a new contract. "It's disappointing to see a pay freeze again in the recovery plan," Ralph Sicuro, vice president of the firefighters union, said.

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